Prefatory Note

The attached document represents the most complete and accurate version available based on original copies culled from the files of the FOMC Secretariat at the Board of Governors of the Federal Reserve System. This electronic document was created through a comprehensive digitization process which included identifying the best-preserved paper copies, scanning those copies,1 and then making the scanned versions text-searchable.2 Though a stringent quality assurance process was employed, some imperfections may remain.

Please note that this document may contain occasional gaps in the text. These gaps are the result of a redaction process that removed information obtained on a confidential basis. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act.

1 In some cases, original copies needed to be photocopied before being scanned into electronic format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other blemishes caused after initial printing). 2 A two-step process was used. An advanced optimal character recognition computer program (OCR) first created electronic text from the document image. Where the OCR results were inconclusive, staff checked and corrected the text as necessary. Please note that the numbers and text in charts and tables were not reliably recognized by the OCR process and were not checked or corrected by staff.

STRICTLY CONFIDENTIAL (FR) CLASS I FOMC

AUGUST 14, 1998

MONETARY POLICY ALTERNATIVES

PREPARED FOR THE FEDERAL OPEN MARKET COMMITTEE

BY THE STAFF OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

Strictly Confidential (F.R.) August 14, 1998Class I -- FOMC

MONETARY POLICY ALTERNATIVES

Recent Developments

(1) The stable policy adopted at the July Committee meeting came as no surprise to

market participants. In the event, the federal funds rate averaged just a little above its intended

level of 5-1/2 percent over the intermeeting period.1 Investors appeared mostly to shrug off

incoming data on the U.S. economy indicating more underlying strength in domestic demand and

economic activity than foreseen, focusing instead on overseas developments. In July, as the

prospects for meaningful policy initiatives in Japan initially appeared to improve with a change

in government and the yen/dollar rate stabilized, yields on Treasury notes and bonds rose

somewhat (chart). In August, however, optimism about Japanese policy faded; a weakening yen

against the dollar and its implications for a number of emerging market economies, especially

those in Asia with currencies tied to the dollar, along with deepening troubles in Russia, induced

a widespread shift toward safe-haven currencies and securities. Treasury yields moved lower

both on this flight to quality and on the assessment of market participants that a higher dollar and

weaker aggregate demand abroad would damp U.S. output and inflation in the medium term.

Concerns about the profit outlook, especially in light of continuing turmoil in Asia, weighed on

private securities markets in the United States. Equity prices, as gauged by the Wilshire 5000,

were down about 7-1/2 percent over the intermeeting period, and risk spreads on junk bonds rose

appreciably further. These developments apparently strengthened the conviction that monetary

1 The switch to lagged reserve requirements in the maintenance period beginning July 30went smoothly for both depository institutions and the Federal Reserve System.

Chart 1

Treasury Yield Curve Percent

1 3 5 7 10 20Maturity in Years

Eurodollar Futures

Three-month- ---- 06/30/98........ 07/29/98

Percent-- 6.00

08/13/98 .

* * - -. .

S5.50

I I I I9/98 12/98 3/99 6/99

Contract Months9/99 12/99

Selected Stock Indexes lndex(7/97) = 100

1997 1998

Yen /Yen/Dollar and 10-Year Treasury Yield

$ Percent

Yen/$ July 1(left scale) FOMC

Daily

I.

140

135

': :. A* .

-* . : . *.11

. . *.-

10 Year Treasury:Yield (right scale)

I I

May Jun

1998

--- 5.9

-I '5.3Jul Aug

Treasury Inflation-ProtectedSecurities RatesDaily

Five-year

Ten-year

Thirty-year

I t I I I I I I , i

1997

Percent

July 1FOMC

v-p

1998

Dollar Exchange Rates Index (7/97 =100)

1997 1998* Against 29 U.S. trading partners # Against 16 major currencies

lr~i~'

• I I

I I I I I I I I I I I I l

*

, 2.

-2-

policy would be on hold for longer than previously anticipated and encouraged a minority view

that the next move could well be toward ease. On balance over the intermeeting period, Treasury

yields fell as much as 1/4 percentage point, with declines greatest in the intermediate-term

maturity range.

(2) Against the backdrop of waning confidence that Japanese authorities will deal

effectively with financial institution problems and provide adequate fiscal stimulus, the dollar

appreciated over the intermeeting period 5-3/4 percent against the yen, and the Japanese stock

market fell 5 percent overall, with bank stock prices down 18 percent. The weakness in the yen

renewed speculation that China may choose to devalue the renminbi, which added to downward

pressures on the Hong Kong dollar. Higher interest rates in Hong Kong, data showing

unemployment at a fifteen-year high, and poor earnings reports sent the Hang Seng stock price

index down more than 15 percent. In most other Asian economies, stock markets were off

significantly. Asset prices in Russia continued to fall in often disorderly markets. The ruble

traded near, and at times below, the lower edge of its official band, and banks encountered

funding problems as concerns mounted about the Russian budget and prospects for debt

repayment, in part stemming from further softness in oil prices. Russian equity prices plunged

more than 25 percent, and spreads on Russian Brady bonds over U.S. Treasuries soared more

than 61/2 percentage points. Credit-risk spreads for Brady bonds of other emerging market

countries increased from 40 to 400 basis points over the period. Declining oil prices and slack

demand for other commodities put pressure on other currencies as well, including the Mexican

peso and Canadian dollar. Most interest rates rose in Canada, as market participants increasingly

expected the currency's weakness to trigger monetary policy tightening, but the deepening crisis

-3-

in Asia and Russia induced decreases in market interest rates in other Western industrial

countries. Data releases showing a slowdown in U.K. economic growth contributed to an

unwinding of expectations for an imminent rate hike by the Bank of England and a rise in the

dollar against the pound. The dollar was little changed on balance against continental European

currencies.

The Desk did not intervene

during the period for the accounts of the System or the Treasury.

(3) After averaging nearly 6 percent over March to June, M2 growth moderated to a 5

percent rate in July. This slowing was expected and moved M2 growth down closer to the

projected third-quarter increase in nominal income. Recent stock market weakness seems to

have been associated with some shift in household investment preferences, as evidenced by the

cessation of flows into equity mutual funds and increased flows into M2 money funds in late July

and early August. M3 was about flat in July, even though bank credit grew at a 5 percent pace;

however, large time deposits ran off sharply, owing largely to substitution of overseas sources of

funding for deposits, particularly at the U.S. branches and agencies of European banks.

Institutional money funds also declined in July as investors evidently shifted into market

instruments around quarter end to take advantage of a temporary spike in short-term interest rates

that was only partially reflected in more slowly adjusting money fund yields. From the fourth

quarter of last year through July, M2 and M3 grew at rates of 7 percent and 81/2 percent,

respectively.

(4) Borrowing by households and businesses has edged down of late, but remains

brisk, boosted by the heavy pace of equity retirements and robust private spending. With long-

-4-

term interest rates low, borrowing has been concentrated in bond and fixed-rate mortgage

markets. Although investors in securities markets seem to have become a bit more cautious, the

August survey of senior loan officers suggested that standards at commercial banks were little

changed over the past three months and terms on business loans were eased slightly further on

net.2 The federal government has continued to pay down debt on a seasonally adjusted basis.

Growth of total domestic nonfinancial debt has slowed to the 5 percent area in recent months,

leaving its growth from the fourth quarter of last year through June at a 6 percent rate.

2 The slight narrowing of spreads reported in the survey is somewhat at odds withanecdotal information from market sources that spreads have stabilized or ticked up for broadlysyndicated business loans.

-5-

MONEY, CREDIT, AND RESERVE AGGREGATES(Seasonally adjusted annual rates of growth)

1997:Q4to

May June July July2

Money and Credit Aggregates

M1Adjusted for sweeps

M2

M3

Domestic nonfinancial debtFederalNonfederal

-3.14.7

4.9

0.4

n.a.n.a.n.a.

0.55.3

7.0

8.6

6.0-0.98.3

Bank CreditAdjusted1

Reserve Measures

Nonborrowed Reserves

Total ReservesAdjusted for sweeps

Monetary BaseAdjusted for sweeps

Memo: (millions of dollars)

Adjustment plus seasonalborrowing

Excess Reserves

-11.7

-9.6-0.3

1150

-15.4

-15.23.8

5.06.6

251

1620

-4.9

-4.85.9

5.56.5

258

1368

1. Adjusted to remove effects of mark-to-market accounting rules (FIN 39 and FASB 115).2. For nonfinancial debt, 1997:Q4 to June.

NOTE: Monthly reserve measures, including excess reserves and borrowing, are calculated by proratingaverages for two-week reserve maintenance periods that overlap months. Reserve data incorporateadjustments for discontinuities associated with changes in reserve requirements.

Policy Alternatives

(5) Compared with the forecast prepared for the July Greenbook, the staff projection

now calls for slightly less core inflation, reflecting in part a higher foreign exchange value of the

dollar as well as somewhat less pressure in labor markets. Assuming an unchanged stance of

monetary policy, the Greenbook forecasts that real GDP will expand over the second half of this

year a little more slowly than the rate of growth of its potential. Next year, output growth

moderates to 1-3/4 percent, below the 2 percent lower end of the FOMC members' central

tendency range reported in July. The underlying pace of domestic final demand growth is

expected to ebb appreciably, owing partly to the drop in equity prices as well as to the

multiplier/accelerator effects of earlier downshifts in inventory investment and net exports. The

unemployment rate should edge up to a little more than 5 percent by the end of next year.

Although joblessness would remain below its estimated natural rate, the effects of tight labor

markets on inflation should be about offset by lower inflation expectations and the continuing

pass-through of dollar appreciation; abstracting from technical changes, core CPI inflation is

expected to hold steady in 1999. The staff projects that the overall CPI will rise about 2 percent

during 1999, a tad below its forecast for the June/July meeting and around the lower end of the

Committee members' central tendency range.

(6) If the Committee found the staff forecast, with inflation and unemployment both

staying relatively low, to be both a reasonable expectation and a desirable outcome, it

presumably would maintain the current 51/2 percent federal funds rate, as under alternative B.

The Committee could still favor alternative B even if it saw higher inflation eventually, but was

rather uncertain about its expectation of the eventual pickup in inflation, given the surprisingly

-7-

favorable price performance of recent years. The odds on a significant price acceleration within a

year or so may be seen as low; in such circumstances, delay would not materially jeopardize the

Committee's goal of containing inflation and would buy some time to accumulate information on

the evolving dynamics of inflation and hence the need for tightening. Moreover, the Committee

may want to weigh any concerns about higher inflation against the increasingly precarious

conditions in global financial markets. The greater fragility of these markets evident over the

intermeeting period may suggest that the potential for adverse effects of a tightening of U.S.

monetary policy on other economies has risen further.

(7) With inflation low, aggregate demand apparently decelerating, and the outlook for

Asia quite uncertain, market participants anticipate no policy action at this meeting, and market

interest rates are likely to be little affected by selection of alternative B. Under the Greenbook

forecast, information about prospective corporate earnings is likely to disappoint investors,

keeping equity prices from rebounding and possibly precipitating a further decline. Absent such

a decline, which could weaken the exchange value of the dollar as investments in the United

States looked less desirable, the dollar should edge higher in coming months, most notably

against the yen: The Japanese economy is likely to remain weak and skeptical market

participants probably will require substantial, concrete actions to deal with the financial system

and the economy before confidence can begin to recover. Should troubles in foreign markets

intensify and spread further, the dollar would tend to strengthen more noticeably, equity prices

would encounter additional downward pressures amid heightened worries about profits, and

interest rates in the United States would continue to decline across the yield curve, reflecting

both a more pronounced flight to quality and developing expectations of monetary policy easing.

-8-

(8) Although the staff forecast envisions a relatively benign domestic macroeconomic

outcome under current money market conditions, the Committee might be concerned either that

in the staff forecast progress toward price stability was stalling or that in its own view inflation

was more likely to escalate noticeably. In either case, it may prefer to apply additional monetary

restraint at this meeting, as in the 25 basis point increase in the federal funds rate of

alternative C. A prediction of worsening inflation pressures might be based in part on

unambiguously tight labor market conditions and the uptrend already evident in wages and

compensation. The odds on much softening of labor markets might be seen as low in light of the

surprising momentum of domestic demand, which has been sustaining growth of employment

and income. And while the Committee recently decided not to tighten, in part because of

unsettled conditions abroad, a continued absence of action would not be desirable if the

Committee were reasonably confident that the domestic economic situation was pointing to

higher inflation rates before very long. In such a situation, delay would only increase the degree

of tightening that would ultimately be necessary. Delayed but greater tightening could be even

more disruptive to financial markets, since economies abroad may not be sufficiently improved

and markets sufficiently settled to absorb the heavier blow.

(9) Markets would be somewhat unsettled by the 25 basis point firming action of

alternative C at this meeting, which would come as a surprise. Short-term market interest rates

probably would back up by at least the rise in the federal funds rate. Investors would project

lower earnings and use higher discount factors, and equity prices almost certainly would fall

significantly further. Boosted nonetheless by higher interest rates, the foreign exchange value of

the dollar likely would firm as well, with particularly large increases against the yen, and Asian

-9-

countries with currencies tied to the dollar would confront considerable pressures to adjust their

pegs. Longer-term dollar interest rates would probably jump initially in response to the rise in

short-term rates, but might reverse course before long if market participants began to question the

likely duration of the tightening move in view of the added strength in the dollar and lower

equity prices; still, real long-term rates are likely to remain at higher levels for a while. Credit-

risk spreads on domestic private debt, as well as on the obligations of a number of foreign

governments and firms, likely would widen noticeably.

(10) In view of recent developments in global financial markets, the Committee might

be inclined to consider a 25 basis point easing of monetary policy, as in alternative A.

Aggregate demand in the United States apparently has already decelerated appreciably, and

Committee members may believe that the staff forecast does not give enough weight to ongoing

deflationary forces coming from developments abroad. Moreover, the staff forecast may be

viewed as underplaying the restrictive effects of recent changes in U.S. financial markets, despite

declines in some nominal yields: The dollar has strengthened on net against a broad basket of

currencies; U.S. equity prices have fallen significantly; and declines in inflation expectations may

have largely accounted for the decline in nominal interest rates, leaving real rates little changed.

Even in the context of the staff view of the economic outlook, with domestic inflation currently

at low levels, the Committee may be willing to risk a slightly less satisfactory outcome in terms

of U.S. inflation performance to help foster a recovery in foreign economies, which would be in

the long-run interest of the United States. Lower interest rates would help ensure that domestic

demand in the United States remains reasonably vigorous. And lower rates, along with

somewhat less strength in the dollar, would benefit a number of foreign economies, even those

-10-

with currencies not tied to the dollar; for those in the latter group, credit-risk spreads would tend

to decline as concerns about foreign debt repayment abated a bit, and the tendency for their

currencies to appreciate would give them room to adopt a somewhat less restrictive monetary

policy.

(11) Under the unchanged money market conditions assumed in the staff forecast,

money and debt growth is expected to decelerate in coming quarters. Expansion of money and

debt, however, continues to outpace that of nominal GDP this year as well as next. Increases in

household sector debt should be restrained by slowing growth in nominal income and the less

rapid advance in expenditures on consumer durables and housing. In the business sector, lower

rates of growth of fixed investment and a slower pace of inventory accumulation will reduce

needs for credit, but this tendency is partly offset in the staff forecast by a leveling out of internal

funds as profits weaken and by the need to finance equity retirements associated with strong

merger and acquisition activity. As income growth slows and profits decline, lenders should

become a bit more cautious, but the projection does not include a substantial pulling back in

credit availability. Federal debt will continue to contract modestly, reflecting continued unified

budget surpluses. On balance, domestic nonfinancial sector debt is projected to expand at about

a 5 percent annual rate over the remainder of the year, leaving this aggregate on a track to expand

at about a 5-3/4 percent rate over 1998 as a whole, somewhat above the midpoint of its 3 to 7

percent annual range.

(12) M2 and M3 are forecast to expand at 5 and 7-3/4 percent annual rates, respectively,

from July to December under alternative B. The moderation in money reflects the expectation of

slightly slower growth in nominal GDP over the second half of the year. In addition, the staff

- 11 -

expects a less-rapid decline in M2 velocity in the second half, in part because the expansion of

mortgage refinancing activity, which had boosted M2 growth over the first half of the year,

comes to a halt. Bank credit is projected to rise less rapidly in the second half of the year than in

the first, reflecting a slowing pace of securities acquisitions as well as some moderation in loan

growth, damping banks' needs for funding through M3-type instruments. Despite the slowing in

M2 and M3 growth during the second half, both aggregates are expected to overshoot their

annual ranges for the year as a whole.3

3 According to elasticities based on staff econometric models, a rise in the federal fundsrate on the order of 1-1/2 percentage points at this meeting would be necessary to restrain M2 to itsannual range by the end of this year. Of course, this calculation does not capture any unusualreactions that might arise in current circumstances from a tightening of this magnitude.

Alternative Growth Rates for Key Money and Credit Aggregates

Alt. A Alt. B Alt. C Alt. A Alt. B Alt. C

Debt

All Alternatives

Monthly Growth Rates

Jul-98Aug-98Sep-98Oct-98Nov-98Dec-98

Quarterly Averages1998 Q11998 Q21998 Q31998 Q4

Growth RatFromJul-98

199719971997

199519961997

e

ToDec-98

Jul-98Dec-98Sep-98

1996 Q41997 Q41998 Q4

1.0 to 5.0 2.0 to 6.0

4.95.35.75.95.85.1

8.07.34.95.7

5.6

7.06.66.8

4.65.76.7

0.48.67.67.57.65.7

11.09.64.87.5

4.95.15.15.15.14.5

8.07.34.85.0

5.0

7.06.36.7

4.65.76.5

4.94.94.54.34.33.9

8.07.34.74.4

4.4

7.06.16.6

4.65.76.3

5.74.44.35.26.35.0

6.35.95.15.2

0.48.88.28.38.36.2

11.09.64.98.1

8.1

8.68.68.7

6.88.88.7

0.48.77.97.97.96.0

11.09.64.87.8

7.8

8.68.58.7

6.88.88.6

7.5

8.68.48.6

6.88.88.5

5.1

6.05.75.7

5.35.05.7

1998 Annual Ranges:

Chart 2

Actual and Projected M2Billions of Dollars

4400

S4350

Actual Level

* Short-Run Alternatives * ASB - 4300

SC

5%4250

4200

4150

4100

1%

4050

4000

S ..- '- 3950

I I I I I I I I 3900Oct Dec Feb Apr Jun Aug Oct Dec Feb

19981997

Chart 3

Actual and Projected M3Billions of Dollars

6000

5900Actual Level

* Short-Run Alternatives

*ASB

c - 5800

6% - 5700

5600

5500

2%

5400

5300

I * I I I I I I I I I I I 5200Oct Dec Feb Apr Jun Aug Oct Dec Feb

19981997

Chart 4

Actual and Projected DebtBillions of Dollars

16600

164007%

Actual Level

- Projected Level 16200

*B

16000

15800

3%15600

- 15400

15200

. 15000

- 14800

14600

Oct Dec Feb Apr Jun Aug Oct Dec Feb

19981997

-13-

Directive Language

(13) Presented below is draft wording for the operational paragraph that includes the

usual options for Committee consideration.

OPERATIONAL PARAGRAPH

In the implementation of policy for the immediate future, the Committee seeks

conditions in reserve markets consistent with maintaining/INCREASING/DECREASING the

federal funds rate at/TO an average of around ___ [DEL: 5-1/2] percent. In the context of the

Committee's long-run objectives for price stability and sustainable economic growth, and giving

careful consideration to economic, financial, and monetary developments, a

somewhat/SLIGHTLY higher federal funds rate would/MIGHT or a SOMEWHAT/slightly

lower federal funds rate WOULD/might be acceptable in the intermeeting period. The

contemplated reserve conditions are expected to be consistent with moderate growth in M2 and

M3 over coming months.

August 17, 1998SELECTED INTEREST RATES(percent)

97 -- High-- Low

98 -- High-- Low

MonthlyAug 97Sep 97Oct 97Nov 97Dec 97

Jan 98Feb 98Mar 98Apr 98May 98Jun 98Jul 98

WeeklyJun 12 98Jun 19 98Jun 26 98Jul 3 98Jul 10 98Jul 17 98Jul 24 98Jul 31 98Aug 7 98Aug 14 98

DailyJul 29 98Jul 30 98Jul 31 98Aug 3 98Aug 4 98Aug 5 98Aug 6 98Aug 7 98Aug 10 98Aug 11 98Aug 12 98Aug 13 98Aug 14 98

Short-Term Long-Term

Treasury bills CDs m U.S. gormt constant n y corporate micia onventional homefederal secondarymarke nda comm. aturity yields indexed yields -utiity municipal mortgagesfunds secondary maet maret paper maturity yields ond primary marketrecently Buyer

3-month 6-month 1-year 3-month 1-month 3-year 5-year 10-year 30-year -year 10-year offered fixed-rate ARM

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

5.80 5.27 5.40 5.66 5.825.05 4.85 4.99 5.07 5.34

5.87 5.24 5.24 5.23 5.745.32 4.89 4.94 4.92 5.50

5.54 5.14 5.19 5.27 5.605.54 4.95 5.09 5.23 5.605.50 4.97 5.09 5.17 5.655.52 5.14 5.17 5.17 5.745.50 5.16 5.24 5.24 5.80

5.56 5.04 5.03 4.98 5.545.51 5.09 5.07 5.04 5.545.49 5.03 5.04 5.11 5.585.45 4.95 5.06 5.10 5.585.49 5.00 5.14 5.16 5.595.56 4.98 5.12 5.13 5.605.54 4.96 5.03 5.08 5.59

5.47 5.00 5.14 5.14 5.595.55 5.04 5.12 5.12 5.595.45 4.93 5.11 5.13 5.605.87 4.94 5.03 5.10 5.605.46 4.94 5.02 5.07 5.595.50 5.01 5.04 5.08 5.595.51 4.96 5.04 5.08 5.595.57 4.95 5.01 5.09 5.605.57 4.93 5.00 5.04 5.595.52 4.89 4.94 4.97 5.58

5.49 4.94 5.01 5.09 5.605.61 4.94 5.01 5.10 5.605.63 4.97 5.01 5.10 5.595.69 4.98 4.99 5.09 5.595.54 4.97 5.04 5.06 5.595.53 4.95 5.01 5.03 5.595.54 4.90 5.00 5.03 5.595.44 4.86 4.96 4.98 5.595.56 4.86 4.95 4.97 5.585.47 4.90 4.93 4.94 5.585.58 4.89 4.94 4.95 5.585.60 4.91 4.97 4.99 5.585.52 p 4.90 4.93 4.98 5.58

5.90 6.64 6.79 6.92 7.12 3.67 3.675.37 5.69 5.72 5.74 5.90 3.52 3.27

5.71 5.70 5.72 5.75 6.05 3.93 3.805.44 5.28 5.32 5.40 5.60 3.70 3.65

5.55 6.06 6.16 6.30 6.58 3.57 3.575.49 5.98 6.11 6.21 6.50 3.61 3.585.49 5.84 5.93 6.03 6.33 3.60 3.575.53 5.76 5.80 5.88 6.11 3.55 3.545.78 5.74 5.77 5.81 5.99 3.63 3.60

5.46 5.38 5.42 5.54 5.81 3.73 3.685.47 5.43 5.49 5.57 5.89 3.72 3.665.51 5.57 5.61 5.65 5.95 3.79 3.715.49 5.58 5.61 5.64 5.92 3.86 3.755.49 5.61 5.63 5.65 5.93 3.92 3.755.51 5.52 5.52 5.50 5.70 3.88 3.725.51 5.47 5.46 5.46 5.68 3.87 3.76

5.49 5.52 5.53 5.51 5.72 3.89 3.715.52 5.49 5.51 5.47 5.67 3.86 3.715.54 5.52 5.50 5.46 5.65 3.88 3.735.53 5.49 5.46 5.44 5.63 3.89 3.765.50 5.44 5.41 5.41 5.61 3.89 3.755.50 5.48 5.47 5.49 5.71 3.88 3.775.51 5.47 5.47 5.46 5.68 3.86 3.755.52 5.48 5.51 5.50 5.73 3.86 3.765.51 5.39 5.43 5.43 5.66 3.87 3.785.50 5.31 5.36 5.40 5.60 3.88 3.80

5.52 5.49 5.52 5.52 5.77 3.87 3.775.52 5.49 5.52 5.50 5.73 3.87 3.775.53 5.48 5.52 5.50 5.72 3.87 3.775.52 5.44 5.46 5.46 5.67 3.87 3.775.52 5.42 5.44 5.43 5.65 3.87 3.775.50 5.38 5.43 5.43 5.66 3.87 3.785.50 5.38 5.43 5.44 5.67 3.87 3.785.50 5.33 5.39 5.40 5.63 3.88 3.805.50 5.35 5.39 5.41 5.63 3.89 3.805.50 5.30 5.33 5.37 5.60 3.87 3.795.49 5.29 5.34 5.40 5.62 3.88 3.805.50 5.32 5.38 5.44 5.60 3.88 3.80

-- 5.30 5.34 5.40 5.55 3.88 3.81

8.27 6.14 8.18 5.917.05 5.40 6.99 5.45

7.19 5.52 7.22 5.716.86 5.25 6.89 5.50

7.677.587.447.247.10

6.977.027.117.107.166.986.93

6.946.966.926.876.896.986.927.046.987.05

5.685.645.635.595.44

5.325.335.415.445.455.365.35

5.325.365.365.345.335.375.355.365.375.34

7.487.437.297.217.10

6.997.047.137.147.147.006.95

7.046.946.966.986.916.946.966.976.946.91

5.555.555.515.495.52

5.545.605.695.675.695.695.63

5.715.685.685.665.605.645.655.625.615.60

NOTE: Weekly data for columns 1 through 12 are week-ending averages. As of September 1997, data in column 6 are interpolated from data on certain commercial paper trades settled by the Depository Trust Company; priorto that, they reflect an average of offering rates placed by several leading dealers. Columns 13 and 14 are 1-day quotes for Friday or Thursday, respectively. Column 14 is the Bond Buyer revenue index. Column 15 is

the average contract rate on new commitments for fixed-rate mortgages (FRMs) with 80 percent loan-to-value ratios at major institutional lenders. Column 16 is the average initial contract rate on new commitments for 1-

year, adjustable-rate mortgages (ARMs) at major institutional lenders offering both FRMs and ARMs with the same number of discount points.p - preliminary data

Money and Debt AggregatesSeasonally adjusted

Strictly Confidential (FA)-Class II FOMC

August 17,1998

Money stock measures and liquid assets _ Domestic nonfinancial debt

nontransactions componentsPeriod M1 M2 I o 3onyM3 U.S.P e r io d M 1 M 2 In M2 In M3 only M government' other' total'

1 2 3 4 5 - 6 7 8

Annual growth rates( MtAnnually (Q4 to Q4)

199519961997

Quarterly(average)1997-Q3

Q41998-Q1

Q2

Monthly1997-July

Aug.Sep.Oct.Nov.Dec.

1998-Jan.Feb.Mar.Apr.MayJuneJuly p

Levels (Sbillions)iMonthly

1998-Mar.Apr.MayJuneJuly p

Weekly1998-July

Aug. 3p

1.

-1.6-4.5-1.2

0.30.93.00.3

0.26.2-8.5-1.88.27.6

-2.63.15.1

-0.3-3.1-3.2-3.1

1081.11080.81078.01075.11072.3

1084.71061.61070.11073.0

1085.4

3.94.65.7

5.67.18.07.3

4.59.96.66.27.57.0

7.69.68.39.52.85.24.9

4132.34165.14174.94193.04210.1

4214.64202.34208.84212.9

4224.5

6.68.78.4

7.69.49.99.8

6.111.212.39.17.36.8

11.311.99.4

13.04.98.17.7

3051.23084.33096.93117.93137.8

3129.93140.73138.83139.9

3139.1

15.415.319.6

16.819.320.216.5

25.913.616.316.125.325.3

19.16.8

32.712.415.96.1

-12.8

1394.81409.21427.91435.21419.9

1406.41417.51416.21426.5

1439.2

6.16.88.8

8.210.011.09.6

9.510.89.08.5

11.811.5

10.48.9

14.410.26.15.40.4

5527.15574.35602.85628.15630.0

5621.05619.85625.05639.4

5663.8

4.43.80.7

0.00.40.0

-1.4

1.51.30.80.0

-0.41.5

-0.5-1.21.4

-1.8-4.0-1.0

3797.3791.3778.3775.

5.85.96.5

6.17.68.48.3

6.26.76.78.08.47.5

8.19.38.58.57.97.1

11619.511701.811778.411847.7

5.45.35.0

4.55.86.35.9

5.05.35.26.06.26.0

5.96.76.76.04.95.1

15416.815493.415557.215623.5

p preliminarype preliminary estimate

Debt data are on a monthly average basis, derived by averaging end-of-month levels of adjacent months, and have been adjusted to remove discontinuities.

NET CHANGES IN SYSTEM HOLDINGS OF SECURITES 1

Millions of dollars, not seasonally adjusted

STRICTLY CONFIDENTIAL (FR)

CLASS II-FOMC

Treasury bills Treasurycoupons Federal Net change

Net purchases 3 agencies outrightPeriod Net 2 Redemptions Net with Redemptions Net redmtions holdings

purchases (-) change 1 year 15 5-10 over 10 () Change _total 4 Net RPs

199519961997

1997 ---01---02---03---Q4

1998 ---Q1---02

1997 AugustSeptemberOctoberNovemberDecember

1998 JanuaryFebruaryMarchAprilMayJuneJuly

WeeklyApril 29May 6

132027

June 3101724

July 18152229

August 512

Memo: LEVEL (bil. $) 6August 12

10,9329,9019,147

4,602

4,545

3,550

215.7

390524

5,549

619877644

3,409

1,5011,369

10,0329,9019,147

4,602

4,545

-2,0003,550

4,545

-2,000

3,550

1,432 2,5291,116 1,6553,849 5,897

698 1,2371,233 1,894

1,918 2,766

283 743495 -

5,3663,898

19,680

3,3665,8222,6977,794

2,2622,993

2,697

3,3234,471

2,2622,993

96.7

1,7762,0151,996

607376598416

7,9415,179

32,979

5,3149,4512,744

15,471

478 4,311286 4,571

3,3411,0026,2248,245

-478

4,7894,571

-1,311

-1,311

1,049

242.2

1,003409

1,540

230498571241

6099

179105215

26

105074

25

14

25

50

L __________

16,97014,67040,586

5,08413,554

2,17319,775

2,2518,022

-1793,236

7876,198

12,790

-2,478-10

4,7398,047

-25-1,311

-14

-25

-1,311

1,049-50

-1,0235,351

-64

-11,1496,771

-4,4938,807

-15,40910,707

7,669-181

-4,4125,5197,700

-21,9854,2622,3149,405

-14,80616,108-9,397

15,594-32,580

-389,170

-4,1734,462

-7,86710,838

4,090-1,629-5,8728,421

-10,0858,153

-7,5529,774

458.4 -15.7

1. Change from end-of-period to end-of-period. 4. Reflects net change in redemptions (-) of Treasury and agency securities.2. Outright transactions In market and with foreign accounts. 5. Includes change in RPs (+), matched sale-purchase transactions (-), and matched purchase sale transactions (+).3. Outright transactions in market and with foreign accounts, and short-term notes acquired 6. The levels of agency Issues were as follows:in exchange for maturing bills. Excludes maturity shifts and rollovers of maturing issues. I ,,#in I

August 12

1 year 1-5 5-10 over 10 total0.2 0.1 0.2 0.0 0.5

August 14, 1998

43.0 52.2

2,000

2,000

3,550

I